iding on a robust economic recovery, Singapore’s chemicals cluster in 2017 registered a 25.1% rise in manufacturing output to S$82.8 billion compared to S$66.1 billion in 2016.
It was lifted by a 12% growth in the fourth quarter, with rises in all segments. In that quarter the “petrochemicals segment grew by 23 per cent on the back of production capacity expansions, while the petroleum segment expanded by 13 per cent supported by higher refining margins”, said the Singapore Economic Development Board (EDB) in its Economic Survey of Singapore 2017.
The EDB also reported that chemicals and chemical products, and mineral fuels, were the key contributors to a full-year external demand growth of 4.1%, compared to the 1.1% growth in 2016.
The output value accounted for 25.8% of Singapore’s total manufacturing output in 2017 (24.5% in 2016), coming in second behind the electronics cluster that achieved stronger growth during the year.
The 2017 output breakdown saw the petroleum segment recording a 39.6 % jump to S$35.6 billion from S$25.5 billion previously, while petrochemicals notched a 25.1% increase to S$33.4 billion compared to S$26.7 billion the previous year. The specialty chemicals segment declined slightly to S$9.2 billion from S$9.5 billion previously. Other products also saw a marginal rise to S$4.6 billion from S$4.5 billion.
Overall value added for the cluster continued its momentum with a 4.4% increase to S$14.3 billion (S$13.7 billion), placing it fourth highest in the manufacturing sector. Overall value added per worker rose 4.3% to S$572.6 million from S$549.1 million previously, the second highest after the biomedical cluster (S$653.3 million).
The petrochemicals segment’s value added was S$7.3 billion, behind semiconductors (S$16.3 billion) and pharmaceuticals (S$10.2 billion). However, the petrochemicals segment’s value added per worker was the second highest at S$1.29 million, after pharmaceuticals’ S$1.38 million.
For the first six months of 2018, output of the chemicals cluster increased 8.7% compared to the same period in 2017. The first five months recorded average growth of more than 8% with January notching a 13.7% output increase, and June which showed growth of 1.6%. The petrochemicals segment averaged double-digit growth during the six-month period, with April recording the highest growth of 27.1%.
Oil Majors Riding out of Crisis
Much of the oil and gas industry has become healthier in the last two years, overcoming the weak demand and low prices since 2014. Oil majors have been reporting better revenues and earnings.
The gradual improvements in the oil companies’ performances have been attributed to the remarkable efficiency gains on per barrel of oil equivalent since the downturn began.
For the 2017 financial year, Royal Dutch Shell saw its profit reaching a three-year high, supported by the rise in crude oil and natural gas prices. Earnings on a current cost of supplies basis were more than three times at US$12.5 billion, compared to 2016. Its revenues totalled US$305 billion, an increase of some 30% over 2016.
Its downstream earnings “benefited from improved refining and chemicals industry conditions”.
The company said that its US$30-billion divestment programme for 2016–18 made good progress in 2017, helping to reduce net debt. Shell’s investment for the year was US$1 billion lower than the US$25 billion for 2016, because of its “continued capital discipline and capital efficiency improvements”.
Shell’s first half 2018 earnings attributable to shareholders were US$11 billion, up 106% from US$5.3 billion in the corresponding six months of 2017. Revenues were US$186 billion compared to US$144 billion for same period of 2017.
ExxonMobil also reported higher earnings, a 151% increase from 2016 to US$19.7 billion. Its downstream earnings of US$5.6 billion, an increase of 25% from 2016 were due to stronger refining and marketing margins, it said.
Its total revenue was US$244 billion, up some 20% over 2016, but slightly lower than for 2015. The company reported that its capital and exploration expenditures were US$23.1 billion, up 20% from 2016.
“We’re planning to invest over US$50 billion in the U.S. over the next five years to increase production of profitable volumes and enhance our integrated portfolio, which is supported by the improved business climate created by tax reform,” ExxonMobil said in its year-end results report.
Its first half 2018 earnings were 17% higher at US$8.6 billion compared to US$7.4 billion for the same period in 2017. Its revenues for the period were higher, reaching US$141.7 billion. The company said that global refining margins strengthened in the second quarter due to higher industry refinery maintenance activity and increased seasonal petroleum product demand.
BP plc reported what it considered its “best ever year”, with a replacement cost profit of US$7.2 billion, compared to the previous year’s loss. Revenues were up almost 25% to US$240 billion.
Overall, it attributed the better earnings to volume growth in its premium fuels and lubricants, the growth of its successful convenience retail partnerships around the world and strong performance in manufacturing.
For the first half of 2018 BP’s profit was US$5.4 billion, more than double the US$2.2 billion in 2017, on higher sales of US$143.6 billion (US$112.4 billion in 2017).
Other big oil companies such as Chevron, Total and Statoil also reported better results in 2017.
Hope on the Horizon?
Until 2017, it had been difficult for most oil companies to make strategic decisions and plan for the future. There is hope on the horizon as the industry emerges from the dark shadows of 2014.
Going forward, oil prices are expected to be volatile. Oil price was at US$27 per barrel in January 2016, and had reached US$57 at the end of 2017 after an OPEC-initiated production cutback. In May 2018, it hit US$80 per barrel, before sliding back down to the mid-US$70 level.
Meanwhile, the International Energy Agency’s (IEA) monthly “Oil Market Report” released in July 2018 said that oil demand growth in the second quarter retreated to 900,000 barrels per day (bpd), partly because of higher prices, from around 2 million bpd in the first quarter. It projected that the first-half 2018 growth would average 1.5 million bpd, falling to 1.3 million bpd in the second half of the year. Overall, the IEA expected growth of 1.4 million bpd in world oil demand in both 2018 and 2019.
It said that there were indications from leading producers that production particularly from Saudi Arabia, its Gulf allies and Russia, was rising and might reach record levels.
The agency said that in spite of that prices have remained relatively high, reflecting “various supply concerns, some of which will be with us for some time to come, e.g. Iran and Venezuela, and others that are probably shorter term”.
The IEA had been flagging the possibility of a supply crunch since 2016. It said that disruptions to global oil supply would become “an even bigger issue as rising production from Middle East Gulf countries and Russia, welcome though it is, comes at the expense of the world's spare capacity cushion, which might be stretched to the limit. This vulnerability currently underpins oil prices and seems likely to continue doing so”.
There were industry concerns about supply being constrained by the cutbacks of development projects over the last few years. As investment in many major projects had been deferred during the downturn, potential supply has been reduced. Oil companies would have to boost their production, and concerns had been raised over whether some producers could keep up with demand.
The IEA had earlier estimated that cumulative oil and natural gas investment needs might reach approximately US$21 trillion between 2017 and 2040.
Global Demand for Energy and Fossil Fuels Will Continue to Rise
The 2018 edition of BP’s “Energy Outlook” says that global primary energy consumption “grew strongly in 2017, led by natural gas and renewables, with coal’s share of the energy mix continuing to decline”.
It says that primary energy consumption growth averaged 2.2% in 2017, up from 1.2% the previous year. It was the fastest growth since 2013. The 10-year average was 1.7% per year. Natural gas accounted for the biggest rise in the energy consumption mix, ahead of renewables and oil.
“Energy Outlook” sees global energy consumption increasing by around a third or so by 2040 as demand continues to grow. It anticipates the growth rate at around 1.3% per annum, declining from over 2% in the previous 20 years. BP expects competitive pressures within global energy markets to intensify.
China, India and other Asian emerging economies are slated to account for around two-thirds of the growth, compared to the flat demand within the Organisation for Economic Co-operation and Development (OECD).
The report says that renewable energy was “the fastest-growing energy source, accounting for 40% of the increase in primary energy”.
As for oil demand, ExxonMobil in its 2017 Annual Report said that it expected global oil demand “to rise by about 20 percent from 2016 to 2040, continuing to be the primary source of energy for transportation and as a feedstock for chemicals”.
Demand for natural gas was expected to jump nearly 40% over the same period, as it continued to be the fuel of choice for electricity generation because of lower carbon emission.
Lower Carbon Future Scenarios Foresee Rising Gas Demand
In its “Sky Scenarios” released in 2018, Royal Dutch Shell expects to see fuel efficiency improve continuously, and some processes shifting towards electricity, “with hydrogen also emerging as an important fuel in the 2030s, although not until after 2050 for heavy industry”.
The report foresees oil demand peaking and beginning to decline by the 2030s. However, it says that by 2070, oil production would remain at 50 million bpd, with biofuels increasingly supplementing the liquid fuel mix.
Natural gas, it says, would “play an important early role in supplanting coal in power generation and backing up renewable energy intermittency”. It expects demand for natural gas to drop after 2040, and by around 2055 “the energy mix is starting to look very different, with solar the dominant primary energy supply source”.
ExxonMobil in its “Energy and Carbon Summary: Positioning for a Lower-Carbon Future” and its “Outlook for Energy: A View to 2040” released in February 2018 says that oil and natural gas would continue to supply about 55% of the world’s energy needs in 2040. Oil, it says, will account for the largest share of the energy mix, “with demand rising about 20% driven by commercial transportation and chemicals”.
In its 2-degree Celsius (2°C) scenarios, referring to the target to keep global temperature to this level to avoid global warming, ExxonMobil says that total energy demand will increase about 0.5% per year, with oil demand declining about 0.4% per annum. It anticipates natural gas demand to rise about 0.9% annually as coal demand drops. Demands for renewables will climb significantly by about 4.5% per year.
ExxonMobil says that with the “ongoing demand coupled with natural hydrocarbon field decline, trillions of dollars of additional investment in oil and gas production will be required, including to meet a 2°C pathway”.
It estimates natural gas demand to rise to 445 billion cubic feet per day, and oil demand to decline to 78 million bpd by 2040.
“Natural gas use is likely to increase more than any other energy source, around 40%, with about half its growth for electricity generation,” said T.J Wojnar, vice president, corporate strategic planning, ExxonMobil. “The abundance and versatility of natural gas, in addition to its significant air quality benefits, make it a valuable energy source to meet a wide variety of needs, while also helping the world to shift to a less carbon-intensive source of energy.”
In its 2017 Annual Report Shell had said that up to 2035, natural gas demand was expected to grow at an average of 2% per year, double the rate of total global energy demand. And for liquefied natural gas (LNG), demand was expected to increase at an average of 4% per year.
According to Shell, the number of countries supplying LNG had gone up to 19, up from 12 at the beginning of the century. It said that in 2017 China alone imported gas (both piped and LNG) from more than 20 countries.
The number of countries importing LNG had quadrupled, with LNG trade increasing from 100 million tonnes to nearly 300 million tonnes over the last 17 years. It said that by the end of 2017, the “global LNG market size had grown by 29 million tonnes with 45% of planned capacity expansion completed”. Much of the new supplies were from the United States and Australia, with “increased output from existing LNG supply facilities in Africa”.
Refining Margins Weaken as Output Grows
The IEA had earlier in the year reported that gross refining margins were higher on average in 2017 than in 2016 across refining hubs of Europe, Singapore and the United States. This was the result of stronger global oil products demand growth, which saw an increase of 1.5 million bpd compared with 2016 “driven in part by a continued low-price crude oil environment and industrial demand growth”.
However, global refining throughput hit a record in the fourth quarter of 2017 at 81.5 million bpd, instead of the usual seasonal slowdown. According to the IEA, “the US returned to pre-hurricane highs in December and China's refiners ran at their highest ever quarterly level. Margins suffered further from both product stock builds and the rally in crude oil prices”.
Increased output and higher oil prices from the last quarter of 2017 to the beginning of 2018 had started to adversely impact oil companies from the first quarter of 2018. Reports said that weak refining margins had hurt first-quarter profits of companies such as ExxonMobil and Chevron Corp, “cutting into overall gains from rising oil prices”.
A report by Thomson Reuters in June 2018 said that Singapore refining margins had fallen to their lowest in two years, due to lower gasoline margins in the face of increased output by refiners following completion of maintenance and as China stepped up exports. Singapore refining margin is the benchmark for oil products profitability in Asia.
Thomson Reuters’ data indicated that refinery margin in Singapore dropped to US$4.28 a barrel near the end of June 2018, the lowest since August 2016. The weak margin was compounded by refineries in China, Japan, South Korea and Singapore ramping up output after maintenance shutdown.
The IEA had predicted growth in demand for refined products to be substantially slower than over the past six years, declining sharply in the early 2020s, making it difficult for some of the refiners. On top of this, it said that by 2030 the Middle East will account for almost a third of the additional 7 million bpd of the extra refining capacity. China and the rest of emerging Asia will account for half.
IEA's July “Oil Market Report” projected that global refining throughput would grow by 2 million bpd from the second to third quarter of 2018, reaching 82.8 million bpd in the fourth quarter of the year.
Chemicals Outlook to Remains Strong
Baden Aniline and Soda Factory (BASF), the world’s largest chemical producer, has in its first half 2018 outlook report projected global growth in the chemicals industry to be “roughly at level of previous year”. It says that global chemical production excluding pharmaceuticals is expected to grow by 3.4% in 2018, slightly below the 3.5% for 2017.
It anticipates a slightly weaker expansion in the advanced economies and a slight pickup in the emerging markets, with China having a significant impact on the global growth rate by almost two percentage points.
The United States emerged from the effects of Hurricane Harvey at the end of 2017 with expectations of significant output growth as new production capacity began to come on stream as demand in key end-user markets continued to expand.
According to the American Chemistry Council’s (ACC) “Year End 2017 Chemical Industry Situation and Outlook”, released in December 2017, the US chemicals industry was “riding a global wave of growth as the world’s major economies experience an upswing for the first time in a decade”.
The report says that increased output and accelerating growth rates that surpass the previous 20-year average will help the industry to reach the US$1 trillion mark within the next five years.
Competitive advantage from shale gas and abundant new supplies of natural gas liquids have spurred substantial capital spending. The ACC says that the number of announced chemical production projects has reached “nearly 320 with a cumulative value of over US$185 billion”.
Nearly 65% of the chemicals industry investment announced since 2010 have been completed or are under construction. As these investments have come online, chemical production volumes have continued to increase, the ACC report says.
Another ACC report released in June 2018 says that despite a slow start to the year, American chemical production is expected to expand 3.4% in 2018 and 3.6% in 2019. It expects output gains to be strongest in agricultural chemicals, consumer products, coatings and bulk petrochemicals and organics.
The ACC attributes the optimism to “strong global growth prospects, rising exports, an upswing in manufacturing, balanced chemical inventories, healthy demand from end-use markets, and favourable shale gas economics”.
“In addition, production of plastic resins is set to grow at the fastest pace since 2012 as new capacity comes online and demand firms for domestic customers and those abroad. The specialty chemicals segment is also set to grow as industrial activity improves.”
Over in Europe, the European Chemical Industry Council (CEFIC) said that European Union (EU) chemicals output grew 2% year-on-year in the first quarter of 2018, down 1.4% from the fourth quarter of 2017, with output rising in some chemicals sub-sectors.
Its outlook report released in July 2018 said that capacity utilisation reached 82.9% in the first quarter of 2018 compared to 84.1% in the fourth quarter of 2017.
The CEFIC said that the chemical business situation in the first half of 2018 was less favourable and expected that “prospects for the coming months remained relatively unchanged”.
At the 12th Gulf Petrochemicals and Chemicals Association (GPCA) Forum held in November 2017, the Saudi Arabian Minister of Energy Industry and Mineral Resources, Khalid Al-Falih, urged leaders of the industry in the Gulf Cooperation Council (GCC) to match the rate of chemical production in the United States.
He highlighted the existing low share of the GCC chemicals industry in the global chemicals pie. In 2017 its share was 2% for basic chemicals and 1% for specialties. GPCA data showed that the Middle East accounted for merely 6% of the world’s petrochemicals output in 2016.
Governments in the GCC have begun investing in large-scale integrated plants domestically and in other countries to diversify their products and compete with global players in the face of changing market demands.
Most of the GCC countries are planning international expansion as a strategy to capture more markets for petrochemicals, as demand for finished products is growing faster than for oil. By co-investing with foreign players GCC can have access to newer technologies to produce higher-value specialty chemicals.
The GCC is said to have close to US$700 billion worth of oil and gas investments underway. The Arab Petroleum Investments Corporation (APICORP), the multilateral development bank focused on the energy sector, has projected close to US$1 trillion worth of investments in the energy sector over the next five years.
Its MENA (Middle East and North Africa) “Energy Investment Outlook”, forecasts that the region will see “a number of critical energy projects pushed through over the next five years”. It says that about US$345 billion had been committed to projects under execution while an additional US$574 billion worth of development has been planned.
Examples include Saudi Basic Industries Corporation’s (SABIC) co-operative agreement with China's Sinopec to explore joint-venture petrochemicals projects in both countries. SABIC also has a joint venture with ExxonMobil to build an ethylene plant near Corpus Christi, Texas; Saudi Aramco (SA), has joined Total SA to build a US$5 billion facility in the kingdom.
SABIC and the US's Dow Chemical, through the US$20 billion joint venture Sadara Chemical Company, is constructing the world's largest integrated complex in Jubail Industrial City to produce high-value products such as isocyanates and polyols for the first time in Saudi Arabia.
The Abu Dhabi National Oil Company (ADNOC) with Borealis of Austria is building the world's largest integrated refining and chemicals complex in Ruwais, UAE with plans to produce 14.4 million tonnes of petrochemical products annually by 2025.
Saudi Aramco had in April 2018 joined three companies in the Indian state of Maharashtra to invest in a US$44 billion mega refinery and petrochemicals complex there.
IFP Énergies Nouvelles, a research company, in a report released in January 2018 struck an optimistic note for the petrochemicals sector in the coming years. It said: “Strong demand from emerging countries is driving the production increases and announcements of new projects. Most investment is concentrated in Asia, the Middle East and the United States.”
In the Asia-Pacific region, investment is striving to meet rising demand and reduce refined product imports. For its part, the United States is using inexpensive and freely available shale gas to bolster its supply of petrochemical products. It is investing heavily in additional petrochemical capacity for export. Investments in ethane cracking construction projects have exceeded US$20 billion.
What’s in Store for Singapore’s Chemical Cluster
Preliminary EDB figures on investment commitments showed that the chemicals cluster received S$1.31 billion in fixed asset investments (FAI) in 2017, higher than the S$1.25 billion in 2016.
The EDB had projected that Singapore would attract a total of between S$8 billion and S$10 billion in FAI for 2018. Investment commitments were maintained at S$9.4 billion, similar to the 2016 level.
EDB chairman Beh Swan Gin was reported to have said that more investment has been coming from China. He mentioned the United States’ corporate tax reform as having potential impact on investments, and that it would be harder to attract investments “that are meant to supply into the US".
The United States was the largest investor in Singapore in 2017, accounting for 38.3% of the year’s total. It is not surprising, as we could surmise that much of that American investments were probably in the chemicals cluster, where ExxonMobil has multi-billion dollar expansion projects.
In June 2017, ExxonMobil opened its new synthetic lubricants and grease plants in Jurong that will become the oil major’s largest grease manufacturing plant in the Asia Pacific. It will also be the only one in the region to produce its flagship synthetic engine oil, Mobil 1.
Singapore is already home to ExxonMobil’s largest refinery in the world with a refining capacity of 592,00 barrels a day and the Singapore Chemical Plant is ExxonMobil’s largest integrated petrochemical complex in the world.
In 2018, ExxonMobil began production of petrochemicals used in adhesives and the manufacturing of tyres at its two new multi-billion dollar integrated manufacturing complex in Singapore. The Escorez hydrogenated hydrocarbon resins plant has the capacity to produce up to 90,000 tonnes annually and is the largest of its kind in the world. Hydrogenated hydrocarbon resins are used in hot-melt adhesives, typically used in packing or baby diapers. The second plant producing premium halobutyl rubber has an annual output capacity of 140,000 tonnes.
ExxonMobil had also earlier in 2017 announced plans to expand its Singapore refinery to increase the production of base oil used in the manufacture of lubricants. Billed as the largest of its kind in the world, it was subsequently reported by the Business Times to be “progressing towards a final investment decision in the first half of 2019” and will begin production by 2023.
Meanwhile, Singapore succeeded to have Neste, the world's largest producer of renewable diesel, make its decision to set up its next large-scale renewable diesel plant here, instead of the United States. Neste is expected to make a final investment decision by the end of 2018. If it proceeds as planned, the new plant will begin production in 2022.
After four years of weak demand and low prices, oil majors have become profitable again. They have managed to increase capital efficiency while reducing expenses. The efficiency gains made by the oil majors on per barrel of oil equivalent since the downturn began in 2014 have been described as remarkable.
However, the industry is still cautious about investments as oil prices have remained volatile, amidst trade and geo-political tensions in some parts of the world.
The market continues to be very dynamic with volatile oil prices and the unpredictability of US shale oil production output is making oil companies more mindful of their priorities.
Shell, for instance, has said that it maintains a “lower forever” approach to its cost management.
Spencer Welch at IHS Markit said that oil firms "are being very cautious, typically testing whether projects are economic at oil prices below US$50 per barrel or even US$40 per barrel before giving project approval". He said that spending on exploration and production has remained weak at about half of what it was in 2011-2014.
Many lessons have been learned from the last few difficult years, and the oil and chemical industries’ lean management approach could mean that new investment could be slow to come by for Singapore’s chemicals cluster.